Co-signing a loan usually involves trust. A parent might co-sign a loan on a car purchased by their child. Friends can co-sign loans for each other. Spouses also sometimes co-sign loans together. But what happens when financial problems prompt you to declare bankruptcy? You might wonder what happens to your co-signing in such a situation. The outcome largely depends on the type of bankruptcy you file and the type of debt you carry.
What is a co-signer?
Co-signers agree to repay a loan if the primary borrower defaults on repayment. From the lender’s perspective, both the debtor and co-signer are equally liable for repaying the loan.
If the debtor is delinquent on the loan, the lender can initiate collection proceedings against either the debtor or the co-signer. Bankruptcy can be used to write off or reschedule the obligations of the debtor, but not those of the co-signer.
It is therefore very important to understand the impact of bankruptcy on co-signers.
Chapter 7 bankruptcy and co-signers
A Chapter 7 bankruptcy case can help discharge several unsecured loans and leave the borrower free of personal obligations to pay them. Yet such a discharge is normally applicable only to the debtor who filed for bankruptcy.
When there is a co-signer on the loan, the creditor has the right to demand payment of the remaining balance from the co-signer even after the borrower’s discharge. Thus, although filing for Chapter 7 can give the borrower a chance to have a new financial beginning, it cannot guarantee the same for a co-signer.
Consequently, this can put the co-signer in a rather unfavorable financial situation.
Chapter 13 and co-signers
One benefit of Chapter 13 bankruptcy that is not available in Chapter 7 is the co-debtor stay. Under Chapter 13 bankruptcy, the co-debtor stay prohibits creditors from attempting to collect on the debt even from a co-signer.
If the main debtor’s repayment plan includes provisions requiring the debt to be paid in accordance with the Bankruptcy Code, the creditor may be barred from collecting from the co-signer of the debt.
There are exceptions to the application of the co-debtor stay, and a creditor could petition the court to remove the stay in such an instance.
Planning before you file
If you’re the co-signer on any loans, it is wise to inform your bankruptcy lawyer about it before filing. If someone has co-signed on your behalf, you should be aware of how bankruptcy impacts your co-signer. In some cases, Chapter 13 will be the best option over Chapter 7, depending on your objectives. Every bankruptcy situation is unique, and thus, the best strategy to pursue depends on your individual situation.
Talk to a Danville, IN, Bankruptcy Lawyer Today
Bankruptcy can give you a financial fresh start. If you are hopelessly in debt, call the Danville bankruptcy lawyer, Chris Arrington, to discuss your financial situation and how bankruptcy might help.